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Thursday, January 15, 2009

Toxic asset repository is the way to go

Treasury mulls bad bank for toxic debt - Telegraph: "The Treasury is understood to have asked the investment bank Credit Suisse to draw up a detailed plan for the logistics of creating a bad bank, in a bid to restore confidence in the sector and to kick-start lending to consumers and businesses.

A bad bank has been floated as a potential measure to help solve the financial crisis by analysts but it has risen up the political agenda in recent weeks as banks' balance sheets look increasingly dire."

I blogged obsessively in October on this sensible way of dealing with the toxic asset question, which are an explosive mixture of sub-prime mortgages which have been marinated in an opaque brew of derivative funds. The mortgages were bundled up into packages to be sold and re-sold as seemingly clever but ultimately stupid derivatives traded in an unregulated, anarchic derivatives market. We should buy them, but at knock down prices.

We have to draw the poison from the system if the banks are to get lending again.

It is a good idea to gather them together in one place, so that they can be studied. Many of them may prove to be illegal Ponzi schemes of the Bernie Madoff type.

Insofar as there are mortgage agreements in them which the homeowner cannot possibly pay off, the government should operate a Right to Rent policy, taking over the mortgage, but allowing the homeowner to stay on in the same house, paying an affordable rent. In this way, the state will once again have a stake in bricks and mortar, which is a good investment in the long run.